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How Large Are Housing and Financial Wealth Effects? A New Approach

  • CHRISTOPHER D. CARROLL
  • MISUZU OTSUKA
  • JIRI SLACALEK

This paper presents a simple new method for measuring `wealth effects' on aggregate consumption. The method exploits the stickiness of consumption growth (sometimes interpreted as reflecting consumption `habits') to distinguish between immediate and eventual wealth effects. In U.S. data, we estimate that the immediate (next-quarter) marginal propensity to consume from a change in housing wealth is about 2 cents, with a final eventual effect around 9 cents, substantially larger than the effect of shocks to financial wealth. We argue that our method is preferable to cointegration-based approaches, because neither theory nor evidence supports faith in the existence of a stable cointegrating vector. JEL Classification: E21, E32, C22

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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 43 (2011)
Issue (Month): 1 (02)
Pages: 55-79

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Handle: RePEc:mcb:jmoncb:v:43:y:2011:i:1:p:55-79
Contact details of provider: Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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